Cigna, CVS Health downgraded on competition in pharmacy benefit manager business

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Edward Jones cut its ratings for Cigna Corp (NYSE:CI) and CVS Health Corp (NYSE:CVS) to hold from buy. The move comes after CVS lost part of a contract with insurer Blue Shield of California, which has selected Amazon.com (NASDAQ:AMZN) and a collection of other companies to take on the tasks of a pharmacy benefit manager.

The analysts estimate that Cigna’s pharmacy benefit manager business contributed two-thirds of the insurer’s profit last year, and they noted that while it is just one contract for CVS, Blue Shield of California’s move highlights the growing competitive threat in the business.

While Blue Shield of California’s multi-player model – for example Amazon will provide home delivery of drugs, while other companies will manage claims, and another will negotiate prices – rather than the familiar bundled approach will be complicated to implement. CVS will continue to provide Blue Shield of California with specialty drug services.

But, the analysts said, the new model could weigh on CVS shares. “The BCS contract could also encourage customers to be more aggressive in negotiating future PBM contracts with industry players,” they wrote.

Shares of Cigna closed up 2%, while shares of CVS were flat.

For Cigna, the analysts pointed to opportunities in MedicareAdvantage and biosimilars, which are generic versions of complex injectable drugs. “The health insurance market is growing due to the expansion of MA, and we believe Cigna can increase marketshare,” they said.

As for CVS, the analysts noted that it is also a diverse model, with a retail drugstore business, Aetna health insurance, specialty drug services, and patient care services. That is helping it transform into a one stop shop for health care.

“Over the long term, this integrated strategy should lead to accelerating earnings growth for the company,” they said.